Financial Management
Practice Questions
Course Introduction
Financial Management focuses on the foundational concepts and techniques essential for effective financial decision-making within an organization. This course covers topics such as time value of money, risk and return, capital budgeting, financial statement analysis, cost of capital, and the management of assets and liabilities. Students will develop an understanding of how to evaluate investment opportunities, design optimal capital structures, and apply financial planning principles to maximize shareholder value. Through case studies and practical exercises, participants will gain the skills necessary to analyze financial problems and implement strategies for sustainable business growth.
Recommended Textbook M Finance 3rd Edition by Marcia
Millon Cornett
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14 Chapters
1604 Verified Questions
1604 Flashcards
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Page 2
Chapter 1: Introduction to Financial Management
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66 Verified Questions
66 Flashcards
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Sample Questions
Q1) Which of the following statements is incorrect?
A)Partnerships have unlimited liability.
B)Most sole proprietors raise money by borrowing from banks.
C)An advantage of sole proprietorships is that the owner has complete control.
D)S corporations are considered a hybrid organization.
Answer: B
Q2) The opportunity to buy stock at a fixed price over a specific period of time is referred to as:
A)stock opportunities.
B)stock options.
C)real assets.
D)restricted stock.
Answer: B
Q3) From the perspective of ownership risk, the best form of business organization is the: A)sole proprietorship.
B)corporation.
C)partnership.
D)S corporation.
Answer: B
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Page 3
Chapter 2: Reviewing Financial Statements
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) You are considering a stock investment in one of two firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $3 million. AllDebt, Inc. finances its $6 million in assets with $5 million in debt (on which it pays 5 percent interest annually) and $1 million in equity. AllEquity, Inc. finances its $6 million in assets with no debt and $6 million in equity. Both firms pay a tax rate of 40 percent on their taxable income. What are the asset funders' (the debt holders and stockholders) resulting return on assets for the two firms?
A)27.5%, and 30%, respectively
B)31.67%, and 30%, respectively
C)33%, and 30%, respectively
D)50%, and 50%, respectively
Answer: B
Q2) These are cash inflows and outflows associated with buying and selling of fixed or other long-term assets.
A)Cash flows from operations
B)Cash flows from investing activities
C)Cash flows from financing activities
D)Net change in cash and cash equivalents
Answer: B
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Page 4
Chapter 3: Analyzing Financial Statements
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124 Verified Questions
124 Flashcards
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Sample Questions
Q1) Trina'sTrikes, Inc. reported a debt-to-equity ratio of 2 times at the end of 2013. If the firm's total debt at year-end was $10 million, how much equity does Trina's Trikes have?
A)$2 million
B)$5 million
C)$10 million
D)$20 million
Answer: B
Q2) Which of the following measures the number of dollars of sales produced per dollar of fixed assets?
A)Fixed asset to working capital ratio
B)Fixed asset turnover ratio
C)Fixed asset management ratio
D)Sales to working capital ratio
Answer: B
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Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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144 Verified Questions
144 Flashcards
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Sample Questions
Q1) You invested $2,000 in the stock market one year ago. Today, the investment is valued at $9,500. What return did you earn? What return would you need to suffer next year for your investment to be valued at the original $2,000?
A)-78.95 percent; 0 percent
B)375 percent; -78.95 percent
C)250 percent; -51.8 percent
D)-78.95 percent; 100 percent
Q2) You are considering an investment that is expected to pay 3 percent in year 1, 5 percent in years 2 and 3 and 7 percent in year 4. If you invest $1,000 today, what will this investment be worth at the end of the fourth year?
A)$1215.07
B)$1215.51
C)$1275.81
D)$1285.75
Q3) Which of the following will not increase a present value?
A)Increase the interest rate
B)Decrease the number of periods
C)Increase the future value
D)None of these answers is correct
Page 6
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash
Flows
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147 Verified Questions
147 Flashcards
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Sample Questions
Q1) People refinance their home mortgages:
A)when rates fall.
B)when rates rise.
C)when rates fall and rise.
D)whenever they need to, independent of rates.
Q2) Which of the following will increase the future value of an annuity?
A)The number of periods increases.
B)The amount of the annuity increases.
C)The interest rate increases.
D)All of these will increase the future value of an annuity.
Q3) What is the present value of a $600 annuity payment over 4 years if interest rates are 6 percent?
A)$475.26
B)$757.49
C)$2,079.06
D)$3,145.28
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Chapter 6: Understanding Financial Markets and Institutions
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the bond's default risk premium.
A)2.10 percent
B)3.05 percent
C)3.40 percent
D)2.45 percent
Q2) Which of these capital market instruments are long-term loans to individuals or businesses to purchase homes, pieces of land, or other real property?
A)Treasury notes and bonds
B)Mortgages
C)Mortgage-backed securities
D)Corporate bonds
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Chapter 7: Valuing Bonds
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122 Verified Questions
122 Flashcards
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Sample Questions
Q1) Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans?
A)Asset-backed securities
B)Credit quality securities
C)Debentures
D)Junk bonds
Q2) Which of the following bonds makes no interest payments?
A)A bond whose coupon rate is equal to the market interest rates
B)A bond whose coupon rates are greater than market interest rates
C)A bond whose coupon rates are less than the market interest rates
D)Zero coupon bond
Q3) Consider the following three bond quotes; a Treasury note quoted at 102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?
A)$1,002.30, $1,000, $1,000, respectively
B)$1,000, $1,000, $5,000, respectively
C)$1,002.30, $994.50, $5,012.25 respectively
D)$1,029.38, $994.50, $5,122.50, respectively
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Page 9
Chapter 8: Valuing Stocks
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) Investors sell stock at the:
A)dealer price.
B)bid price.
C)quoted ask price.
D)broker price.
Q2) Coca-Cola recently paid a $3.00 dividend. Investors expect a 12 percent return on this stock. What is the difference in price if Coca-Cola is expected to grow at 7 percent versus 8 percent?
A)$11.40
B)$16.80
C)$21.60
D)$19.40
Q3) Annual dividends of Pfizer, Inc. (PFE) grew from $0.38 in 2000 to $1.15 in 2007. What was the annual growth rate?
A)2.02 percent
B)17.14 percent
C)28.95 percent
D)202.63 percent
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Chapter 9: Characterizing Risk and Return
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) Which of these is a measure summarizing the overall past performance of an investment?
A)Average return
B)Dollar return
C)Market return
D)Percentage return
Q2) Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 15 percent. The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of
Poker-R-Us are 12 percent and 35 percent.
A)Rail Haul, Idol Staff, Poker-R-Us
B)Idol Staff, Poker-R-Us, Rail Haul
C)Poker-R-Us, Idol Staff, Rail Haul
D)Idol Staff, Rail Haul, Poker-R-Us
Q3) Which of the following are investor diversification problems?
A)Many employees hold mostly their employer's stocks as investments.
B)Many households hold relatively few individual stocks-the median is three.
C)Investors seem to prefer local firms thereby limiting diversification opportunities.
D)All of these are investor diversification problems.
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Page 11
Chapter 10: Estimating Risk and Return
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market?
A)2 percent
B)6 percent
C)8 percent
D)10 percent
Q2) Which of the following is correct?
A)Hedge funds often sell stock they don't even own.
B)Hedge funds maintain secrecy about their holdings, trading, and strategies.
C)Hedge funds are limited to sophisticated investors.
D)All of these statements are correct.
Q3) The constant growth model assumes which of the following?
A)That there is privately held information
B)That the stock is efficiently priced
C)That there are executive stock options available to managers
D)That there is no restricted stock
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Chapter 11: Calculating the Cost of Capital
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118 Verified Questions
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Sample Questions
Q1) A firm has 4,000,000 shares of common stock outstanding, each with a market price of $12.00 per share. It has 25,000 bonds outstanding, each selling for $980. The bonds mature in 20 years, have a coupon rate of 9 percent, and pay coupons semi-annually. The firm's equity has a beta of 1.5, and the expected market return is 15 percent. The tax rate is 30 percent and the WACC is 15 percent. What is the risk-free rate?
A)6.28 percent
B)8.00 percent
C)9.22 percent
D)19.36 percent
Q2) Suppose that PAW, Inc. has a capital structure of 60 percent equity, 10 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock and debt are 17.5 percent, 12 percent and 6.5 percent, respectively, what is PAW's WACC if the firm faces an average tax rate of 28 percent?
A)10.71 percent
B)12.00 percent
C)13.10 percent
D)13.65 percent
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Page 13
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) You are trying to pick the least-expensive machine for your company. You have two choices: machine A, which will cost $100,000 to purchase and which will have OCF of -$7,000 annually throughout the machine's expected life of three years; and machine B, which will cost $125,000 to purchase and which will have OCF of -$2,600 annually throughout that machine's four-year life. Both machines will be worthless at the end of their life. If you intend to replace whichever type of machine you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 15 percent, which one should you choose?
A)Machine A
B)Machine B
C)Both machines A and B
D)Neither machine A nor B
Q2) All of the following are incremental cash flows attributable to the project EXCEPT:
A)opportunity costs.
B)financing costs.
C)substitutionary effects.
D)complementary effects.
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Page 14
Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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112 Verified Questions
112 Flashcards
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Sample Questions
Q1) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. \[\begin{array} { l l l l l }
\text { Time } & 0 & 1 & 2 & 3 \\
\text { Project A Cash Flow } & - 20,000 & 10,000 & 30,000 & 1,000 \\
\text { Project B Cash Flow } & - 30,000 & 10,000 & 20,000 & 50,000
\end{array}\] Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?
A)Accept both A and B
B)Accept neither A nor B
C)Accept A, reject B
D)Reject A, accept B
Q2) All capital budgeting techniques:
A)render the same investment decision.
B)use the same measurement units.
C)include all crucial information.
D)exclude some crucial information.
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Chapter 14: Working Capital Management and Policies
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127 Verified Questions
127 Flashcards
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Sample Questions
Q1) Happy Feet would like to maintain their cash account at a minimum level of $75,000, but expects the standard deviation in net daily cash flows to be $5,000; the effective annual rate on marketable securities to be 7 percent per year; and the trading cost per sale or purchase of marketable securities to be $150 per transaction. What will be their optimal upper cash limit?
A)$80,000.00
B)$99,755.64
C)$76,593.42
D)$149,266.92
Q2) Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000; the effective annual rate on marketable securities to be 6 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal cash return point?
A)$59,094.77
B)$69,588.47
C)$181,131.66
D)$54,000.00
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Page 16